Easing Economy, Tightening Nerves

Asia’s equity markets have fallen again today and are trading at a two-week low after the US Fed said that it sees slower growth in the economy and acted to add additional stimulus to try and boost growth. Asia’s loss is led with a 2.7% decline for the Nikkei and a 1.8% drop in the benchmark Australian index. The former because of further gains in the yen and the latter as commodity prices are weaker.

The price of crude is again below $80 p/bbl (WTI for September is at $79.77 p/bbl and Brent is at $79.10 p/bbl). That is partly a reaction to the comments about weaker economic growth in the US and partly because China imported less oil than expected in July. The weekly US Energy Dept data is due out later today and the key number will be gasoline demand.

The dollar staged a small rally against the euro after the Fed’s promise of further stimulus. It is now trading at $1.3095 per euro and 85.285 against the yen. The price of gold is also a little better, up 0.4% at $1.202.9 per ounce as investors again edge towards haven assets in the midst of broadening uncertainty elsewhere.

Although the US markets closed better than where they were trading when Moscow closed, Russian equities and the ruble will likely open weaker and remain nervous through the morning session, i.e. until the US markets open later. Then we will see how investors in the US view the balance of risk between the additional stimulus and the threat of slower growth.

ONGC & Rosneft? The media story that India’s ONGC may jointly bid with Rosneft for the rights to develop two major oil deposits, Trebs and Titov, is potentially very interesting. Not only because these are large deposits of oil. India has long been looking for an entry into Russia’s energy sector and ONGC tried previously to acquire a major equity stake. It was, for example, one of the companies with a declared interest in buying the Yukos assets before Rosneft acquired them. Access to Russia’s energy sector has been a consistent theme at a political level between both countries. Jointly bidding for new oil fields, major as they are, does not satisfy what India has previously stated it wants; a solid equity position in an established Russian oil major. Without assuming 2+2=4 here, it is very possible that either a) ONGC is now looking at acquiring BP’s equity stake in Rosneft and/or b) it may be a buyer of a minority strategic stake in Rosneft from either the company (it has an approximate 8% stake on its balance sheet – ex Yukos) or as part of the state’s privatization programme. Any such deal would not be automatically at “best price” as it would be part of a broader barter deal and could very easily be at a premium. Amongst the other investments that both sides have on their wish list, India wants more defence equipment from Russia and Moscow is keen for Indian investment into the planned new technology centres,

There are no major economic reports due in the US today, albeit in their heightened state of nervousness, investors are today disproportionately reacting to newsflow that they previously ignored. Such was the reaction to the labour productivity report yesterday. Today, the Treasury Budget update and International Trade reports will be published while, in the EU, the June Industrial Growth report is the only agenda item with market significance.

Activity on Moscow’s bourses continue to suffer from the effects of the smog and heat as investors become ever more worried about the possible negative effects on the economy. Oil is the safety cushion in the midst of the domestic uncertainty. But China continues to play a form of ping-pong with the oil price and adding to Russian equity and currency volatility. Last week, China announced that it will add 50% to its strategic oil reserves and that helped bump the price of crude to over $82 p/bbl. Yesterday the price fell to below $80 p/bbl when China announced that it had imported 15% less oil in July. Can’t blame China for not wishing to pay a high price of the extra oil that it wants to put into storage but just shows again how vulnerable to China is investor sentiment towards Russia.

The main driver of sentiment towards Russian stocks yesterday was the trend in global markets and, especially, the slide in the price of oil to below $80 p/bbl. That, plus the slight increase in risk aversion towards developing market currencies, helped push the ruble back over 30.0 against the US dollar and the equity indices lower than the global average and also across important technical thresholds. The RTS lost 1.8% to end below 1,500 (at 1,492.9) while MICEX ended down 1.5% and below 1,400 (at 1,397.7). The main blue chips were the only active stocks and all closed between 1.0% and 2.0% lower. Acron was one of the few mid-cap stocks to record a gain, rising 0.8% as the fertilizer/potash merger speculation gains ground.

In the London GDR market, the IOB Index fell 2.2% with the high-beta exporters leading the way lower. Evraz and Severstal, which are generally strongest during market rallies, fell the most, losing 3.7% and 4.0% respectively. Magnitogorsk was the most defensive sector name again, losing only 9 basis points. LSR Group, a recent very strong performer, was pulled back to $9.0 with a session loss of 5.3%. Amongst the very few stocks to end with a gain was Global Trans. It lost heavily earlier in the week and yesterday closed up 2.8% with some portfolio buying.